RN Wellness LLC v. Essentials Hero LLC

Background

RN Wellness, LLC and The Perler Group, Inc. sued Essential Hero, LLC and Brandon Bernstein. The plaintiffs alleged, among other claims, violations of the federal Defend Trade Secrets Act, trade-secret misappropriation, breach of contract, interference with business relationships, and unjust enrichment. Essential Hero filed an answer that included a single counterclaim against RN Wellness for breach of contract.

Essential Hero alleged that it sold more than $160,000 in personal protective equipment to RN Wellness. According to the counterclaim, the parties entered a written agreement around August 31 under which RN Wellness agreed to pay $38,737.62 by September 24, 2021, through an agreed payment plan. Essential Hero alleged that RN Wellness failed to make timely installment payments and still owed $8,816.16.

Plaintiffs moved to dismiss the counterclaim under Federal Rule of Civil Procedure 12(b)(1), which concerns the court's subject-matter jurisdiction, and Rule 12(b)(6), which concerns whether a pleading states a legally sufficient claim.

Subject-Matter Jurisdiction

The court first concluded that the counterclaim did not qualify for original federal jurisdiction. The breach-of-contract counterclaim arose under state law, so it did not present a federal question. The alleged damages were $8,816.16, below the $75,000 amount required for diversity jurisdiction.

The court nevertheless held that supplemental jurisdiction could cover the counterclaim. Supplemental jurisdiction allows a federal court to hear a related state-law claim when it shares a common factual basis with claims already properly before the court. The court found that Essential Hero's counterclaim and the plaintiffs' trade-secret claims shared a common nucleus of operative facts because Essential Hero argued that some information allegedly treated as secret had been provided during an earlier transaction between the parties.

The court determined that the counterclaim was permissive rather than compulsory. A permissive counterclaim is related to the lawsuit but does not necessarily arise from the same transaction or occurrence in the way a compulsory counterclaim does. The court explained, however, that whether a counterclaim is permissive does not decide whether supplemental jurisdiction exists.

The court exercised supplemental jurisdiction because handling the counterclaim in the same case would be more efficient and would avoid requiring Essential Hero to bring a separate state-court action based on facts that would already be presented in the federal case. The court also found no statutory reason to decline jurisdiction: the contract issue was not novel or complex, the counterclaim would not substantially predominate, the plaintiffs' claims had not been dismissed, and no exceptional circumstances required declining jurisdiction.

Failure to State a Claim

The agreement's remedies provision stated that a party could terminate the agreement after giving notice of a breach or default and allowing 10 days to cure. It also stated that money due upon termination would become immediately payable.

The court agreed with plaintiffs that the counterclaim did not allege the required notice or failure to cure. Although Essential Hero referred to the written agreement in its opposition papers, the counterclaim did not mention the remedies provision or attach the agreement. The court also stated that it could not rely on a written payment demand attached to a declaration submitted with the opposition when deciding the motion to dismiss.

Because amendment should generally be allowed, the court permitted Essential Hero to file a new counterclaim containing the missing information or attaching the relevant exhibit. The court set November 29 as the deadline for the amended counterclaim.

Disposition

The court denied plaintiffs' Rule 12(b)(1) motion to dismiss the counterclaim for lack of subject-matter jurisdiction. It granted plaintiffs' Rule 12(b)(6) motion to dismiss the counterclaim for failure to state a claim, while allowing Essential Hero to amend it. The parties were ordered to file a joint status report by December 7.